DS: In your several pieces on U.S. sanctions including one published on this blog ten months ago you outline how the August 2017 sanctions affected oil production. Could you briefly summarize the mechanism through which they reduced oil production?
FR: There is strong statistical evidence that the 2017 sanctions were associated with the acceleration of the rate of decline in oil production that took place starting in the second half of 2017. In a recent paper on this, I carry out a battery of statistical tests and find that they decisively support the hypothesis that sanctions significantly contributed to the decline in production. Financial sanctions, and the broader process of what I have called “financial toxification,” made it increasingly difficult for PDVSA to carry out operations that are necessary for the normal functioning of a commercial enterprise (e.g., obtaining letters of credit). Yet perhaps the strongest impact was on the ability of the firm to obtain financing for its joint ventures (JVs) and to renegotiate its debts with suppliers. Financial agreements with JV partners, where the foreign partner (e.g., Chevron) offered loans that were to be repaid out of the JV’s revenue stream, had been remarkably successful in making it possible for production to stabilize or increase. Financial sanctions put a halt to these operations. One of the most striking pieces of evidence regarding their effect is that JVs with Chinese and Russian companies, in which financing was unaffected by the sanctions, we have seen oil production stabilize and continue to rise, while production has plummeted in the remaining sanctions-affected joint ventures.
DS: So did the humanitarian exceptions to those 2017 sanctions have any impact?
FR: Regrettably not. The government never attempted to use these exceptions. Shortly after the publication of the August 2017 Executive Order, I suggested a mechanism that the government and opposition could use to jointly agree on debt issuance under the humanitarian exception. Regrettably, neither side of the political spectrum showed interest, and some sectors were downright hostile – they argued that any agreement with the other side would be the same as conceding. This impasse reflects the reality of the past two years: it has proved impossible to get either of the two sides to consider any type of agreement without looking at it through the prism of the conflict over who holds power.
DS: Have these financial sanctions also affected electricity production?
FR: They are very far from being the primary cause of the electrical crisis, but they have had an adverse effect. Venezuela’s large electricity sector depends heavily on parts and services provided mainly and even solely by international companies such as Siemens and General Electric (GE). These companies provide most of the power generators used by Venezuela’s oil industry as well as the turbines used in the country’s hydroelectric plants. As a result of the 2017 sanctions, the country was unable to continue refinancing their debt with these companies, as it had been doing since 2015 through the issuance of New York law promissory notes.
For example, GE had accepted $182mn of these notes by the time of the financial sanctions. The notes were rendered non-negotiable and went into default. Unable to collect on or even restructure these debts, providers of electricity and oil services significantly cut back their dealings with the country’s oil and electricity sectors. When the state-owned oil company proved unable to replace its power generators, it started tapping the country’s electrical grid more intensively, contributing to the continued overloading of the system which is at the root of its current problems.
DS: In several places you have warned of catastrophic effects of the U.S. oil sanctions imposed this year. What is the evidence so far?
FR: Oil production has fallen from 1150 tbd in January to 734 tbd in June. That’s a 36% decline, which is roughly of the same order of magnitude to the estimated effect of oil sanctions that comes out of cross-national panel data estimates (41-45%). It is also equal to the magnitude of the loss of the U.S. oil market (around 400tbd prior to sanctions). This loss in production represents $9bn in foregone export revenue, which is more than half of the country’s imports last year ($15bn). Unsurprisingly, this year, after sanctions, we have seen a y-o-y decline of 63% in imports, taking imports to less than one-tenth of their 2012 level. We have also have seen very large reductions in the harvest, partly impacted by gasoline scarcity which can also be linked to sanctions.
Again, it is very hard in the social sciences to distinguish between the effects of different potential causes, so I don’t think it’s correct to attribute all of these problems to sanctions. But I don’t think it’s responsible to deny that sanctions are an important contributor. The bottom line is that, regardless of the causes, the country is neither producing nor importing the food needed for 26 million persons to survive. The risk of an outright famine is significant.
DS: How do the oil sanctions affect the electricity sector?
FR: Oil sanctions bar the import from the U.S. of any oil products, and most of the country’s thermoelectric plants run on diesel. These plants both complement and serve as backup for a system that is mostly fed by hydroelectric energy. Venezuela imported 60 thousand barrels a day of diesel from the U.S. prior to sanctions. Those imports came to a halt, and the country has had problems replacing them. As in the other issues we have discussed, sanctions are far from the only nor even the primary cause of the country’s electrical problems, but they have certainly exacerbated those problems.
DS: Notwithstanding popular opinion, you have not actually called for the lifting of sanctions. What is your position on this?
FR: As with any policy measure, sanctions have benefits as well as costs. I have argued that the costs are large. On the benefits side, the issue is more complex. I am skeptical that this set of economic sanctions can by themselves lead to regime change (at least in their current form) but I do think that they are effective in limiting the corruption of the Maduro regime. I still think these benefits are not large enough so as to offset the costs, but it does suggest that we can come up with alternatives that have the same benefits of sanctions in terms of controlling corruption but do not carry the risks of exacerbating the country’s humanitarian situation.
In that sense, I think that an internationally monitored oil-for-food program would allow food imports and production to recover without permitting the government and its cronies from appropriating the resources from oil production.
DS: How have the sanctions limited corruption?
FR: Individual sanctions, of course, have limited the ability of government cronies to use the money that they have stolen. Economic sanctions have reduced the amount of resources that they are able to steal. When you cut off any types of financing, for example, you are also cutting out the government intermediaries that benefited from financial deals; the same reasoning applies to oil sales. The problem is that this is a very blunt instrument, with huge collateral damage, because you are starving corruption by starving the country. An internationally-monitored oil-for-food type program would starve corruption without starving Venezuelans.
DS: Do you think, then, that sanctions have increased the Maduro government’s willingness to negotiate?
FR: They have. But it is one thing to increase the willingness of Maduro to negotiate, and it is another to increase the probability of a negotiated solution. The latter is an outcome that also depends on the opposition’s reaction function. And the opposition’s demands have evolved over time, and in some dimensions they have increased. For example, back in 2018 the opposition would have been willing to take an election with a new electoral council with Maduro in power; now, many sectors in the opposition claim that a free election cannot be held if Maduro is in power.
I think that sanctions can improve the chances of a transition if they are carefully designed to incentivize the government to opt for a negotiated solution. To do that, the costs of the status quo must be raised (and sanctions do that) but the costs of a negotiated solution must be lowered. So you have to be able to give very credible signals that current leaders will not be persecuted in a transition. This is where the opposition and the U.S. have failed.
DS: You have also suggested some sort of oil-for-essentials program. Can you imagine any sort of “debt-for-essentials” program or other way of limiting, specifying or channeling the impact of those sanctions that affect the oil industry and electrical grid?
FR: In principle, such a program could be implemented among similar lines (as I suggested in 2017). However, there is unlikely to be any willingness to provide unsecured lending to the current government without a debt restructuring and considerable policy reforms which do not seem viable at this time. Nevertheless, lending to oil joint ventures may still be possible, under conditions similar to those being used up until August of 2017. One could thus design a mechanism in which oil joint ventures are allowed to receive loans from the foreign partner in case that the JV participates in the oil-for-food program. One idea could be to use the renewal of Chevron’s license for its Venezuela operators to pilot an oil-for-food program: U.S. authorities could extend Chevron’s license if the firm participates in a small-scale oil-for-food program whose experience can be used to design a larger program.
DS: So far these are just ideas being discussed in the public sphere. Have any political actors in any branch of the U.S. government expressed interest? Any figures in the Venezuelan government or other international stake holders?
FR: There has been much interest on the side of Democrats. I recently presented some of these ideas HR Sanctions at the Tom Lantos Human Rights Commission and there was a lot of receptiveness. I haven’t yet seen any signs of interest from Republicans or the Trump administration. In Venezuela, I have had encouraging talks with several opposition leaders. There are two moderate parties – Avanzada Progresista and Cambiemos – that are supporting the idea and asking for its inclusion in the Barbados talks. Some members of the Guaidó administration have also asked me to explain the proposal, and I hope that they will give it full consideration.
